The Absolute Best Ways to Get Restaurant Costs Under Control

Hey there restaurant pros, it’s Dave Scott Peters and welcome to episode 38 of the Restaurant Prosperity Formula. I’ve been coaching restaurant owners since 2003 and the Restaurant Prosperity Formula is based on what the most successful restaurant owners I’ve worked with do on a daily basis to achieve their success. The basic premise of the formula centers around achieving prosperity, freedom from your restaurant and the financial freedom you deserve. To achieve prosperity you have to follow a very specific formula made-up of leadership, systems, training, accountability and taking action.
Today’s topic centers around what the one single system is my members use that allow them to proactively manage their restaurants, help them be successful and take control of their business with all the outside challenges that seem to be crushing typical operators. If you’re ready to take charge of your future, this podcast episode will be a game changer, I promise. Let’s get started. Sometimes it feels like it’s getting harder and harder to make money in the restaurant industry as an independent restaurant. Well, that’s because it is. I don’t need to remind you, I’m going to. Food costs are up. Beverage costs are up. Labor costs are up.
The labor shortage due to the great resignation or heck, COVID shortages. Third-party delivery services are now taking from our bottom line. You now need software to control your cost of goods sold and labor to reservations and social media. Our rents are higher. You’ve got more loans from EIDL money to SBA loans to bail yourself out from the COVID business restrictions. And we’ve run our credit cards higher. Those balances are up and the list goes on. That’s the reality. But I found that my members in my group coaching program are facing the same challenges you are. How they handle them is not how most restaurant owners do. Most restaurant owners blame everyone else for their challenges.
It’s the government, it’s the employees, it’s the customers, it’s my vendors. They ***** and moan about how things have changed and accept their new reality as if there’s nothing they can do about it. But not my members. Don’t get me wrong, my members have bad days. They get upset, angry, even cry. But what they don’t do is accept challenges as their reality. They instead look at their business with a growth mindset and create a plan to adapt and continue their path to success. They’ve been pivoting way before the word pivoting became the industry buzzword. They all proactively manage their businesses and that’s critical. How does this happen time and time again?
One key component is having a plan. Now that plan is called a budget. A budget is critical. It’s not the one you use to open your business and look back a year later. It’s not your profit and loss statement, which is a rear view mirror when we look behind us and say, how did we do? And when you see your food cost is high, when you get your P&L 15 days in the next period, 30, 60, 90, there’s nothing you do about it. It’s too late. Even if it’s just 15 days, hey chef, your food cost is high. even if they say, let me fix it, you’ve made the same ******* mistakes for 45 days in a row and now you want to look backwards and change it. Instead, we need a front windshield.
We need a plan, which is how we move our business forward, lead it forward to achieve the success we need. What food cost do you need to achieve? What systems are you going to put in place to make sure you achieve that food cost? So budgets give us that proactive management. It helps us create our plan for success. What systems are we going to put in place? How quickly are we going to put them in place? When are we going to train people, hold them accountable? And what are our expected results from those systems? See, that’s creating your plan for success. We don’t just click our fingers and go, bang, food cost is lower. What steps are you going to take? Who are you going to train?
How are you going to implement? How are you going to ultimately hold them accountable? That’s critical. That’s a plan. Then most of us never hit our plan. It’s never perfect because a plan is a dream. A plan is what you want to guide people towards, but **** happens and we miss our plan. So we’ve got to put measurements in place on a weekly basis and monthly basis. On a weekly basis, we’re going to measure our prime costs, total cost of goods sold plus total labor costs, our sales. But on a monthly basis, line by line by line, the whole budget the whole P&L side by side to find out where we hit or missed.
So if I was supposed to make $14,000 last month and I’ve only made seven, what went wrong? What systems did I put in place and my managers aren’t using? I need to hold them accountable, retrain them, put it in place again. What if they’re following the systems, but other circumstances come up? I need to create a new plan. Either way, I didn’t make $7,000 I was supposed to. What changes am I going to make over the next 11 months, 10 months, 8 months, 6 months? You get the picture wherever you’re measuring. Small changes. So I don’t give up guest satisfaction. I don’t give up product quality. I don’t give up service levels.
I don’t go against my core values, but I make these tiny incremental changes over the next X months to make that $7,000 back. I’m going to proactively still achieve the profitability I deserve. That’s why that’s so important. That which we measure improves. Now see these members, my members, they understand that one section I talked about when I said they run a weekly prime cost budget variance report is one of the things that is critical. Why? Because those are something called to old timers like me, controllable expenses in the control of management. How I hire, fire, train, utilize my people, purchase product, utilize that product. it is their report card.
As managers, they can’t control you’re driving a Maserati out of the business. They can’t control that you decide to do a Groupon, the crack cocaine of restaurant marketing around a 78% discount. But they can control who they hire, how they train them, onboard them, schedule them, cut them, what they pay them, purchase product from prep and controlling the line and temperature and doing all these things. Portion control, they can control food, beverage, and people. Well, that’s prime cost. It is their report card. So to be very clear, this is the most important number any restaurant should know.
Whether you’re an owner or a manager, the one number you must know to have any chance to make money, prime cost, which is total cost of goods sold. That’s food, bottle beer, draft beer, wine, liquor, merchandise, anything else you sell, total cost. plus total labor cost. That’s from salaried managers, hourly managers to back of house labor by position to front of house labor by position. Everybody all up, including taxes, benefits, insurance. Oh, they’re a part of prime cost too. Now, I will tell you that you also have to use one other number that’s extremely important.
See, to calculate your food cost, a recipe costing card, calculate your labor cost, it’s The equation is use divided by sales. Well, it’s no different here. The use is the total cost of goods sold, right? All the product I used, plus the labor I used, including taxes, benefits, insurance, divided by gross sales. Now, gross sales, to be important to understand this, is the ring at the register before discounts have been removed. not including sales tax. Sales tax is not a sale. So if you were to sell, say, $10 burger and you comp $5, gross sales is $10. That is critical to make sure we measure our efficiencies. Now I can tell you, I started coaching independent restaurant owners back in 2003.
The old target back then, the experts said, for a full service restaurant, your prime cost target was 65%. For a quick service, 60%. And that’s kind of how things started. Now I try to get my members about five points lower, but the truth of the matter is, ever since the economy took a crap, what is that, back in 2007, our industry has changed. All those expenses we talked about are going up. Well, all we did was add some more services, but they’ve been going up ever since. And the truth of the matter is, if you do at least $850,000 a year in gross sales annually, Your prime cost target is not 65% anymore, it’s 55. That means there’s 10 points on the table.
Imagine if you’re $1,000,000 a year business and there’s 10 points on the table on the same sales you’re doing now. If you were to control your prime cost, that’s $100,000 in bottom line efficiencies. Your money on the same sales, no get rich scheme becoming more efficient. That’s what we need to start to look at. Now, if you do under $850,000 a year in sales, Your prime cost target is 60% because your labor cost is going to run higher. We don’t have as many dollars to drop to the bottom line and we have minimum staffing levels in many cases. But I will also tell you that if your sales start to reach $2 million, 3 million and higher, your prime cost target drops like a rock.
So if you do $2 million, I’m starting to look at you at a 50% prime cost. As you get to 3 million and higher, depending on the product you serve, we might be looking at something in the high forties without giving up guest satisfaction, without cutting product quality, without going against our core values. See, based on your location. So where you’re located, quality of product you choose to sell, your price point, your demographic that walks in the door, your style of service, your core values. We’re going to set a plan that stays true to who you are. We don’t just drop prime cost, by the way. I’m not going to go, oh, get your food cost down to 19%. Buy ****** product. Wrong.
But there are so many things we can do to control our food cost proactively in your control that we can put in place. But the only way to do that to understand is we’ve got to have a budget. But we also have to understand that prime cost being the most important number, you can’t just continue to use industry averages. See this budget, what I talked about, location, style of service, quality of product and so on is unique to you. So when the National Restaurant Association says the average restaurant runs a 34% food cost, that’s not your number. What if you’re a pizza pasta place and should be in the low 20s? What if your steakhouse, you might be 38%, 40%?
See, you can’t use industry standards. Because if you did, you’d run a 34% food cost and a 33% labor cost based on all the national rags and what you see on TV and the different consultants and coaches that are out there. That means everybody’s going to tell you to run a 67% prime cost. Hell, that’s two points above the 65 number. And here’s the truth of the matter is, if you don’t take inventories on a weekly basis, if you don’t track your labor on a daily basis and you don’t have a budget, odds are you’re running a 78% prime cost or worse. And the truth of the matter is with rising costs and labor and COVID and all these things, many restaurants are worse than 78%.
And you wonder why you’re not making money. You’re accepting what’s happening to you. Instead, you need to take control. And to do that, you’ve got to understand that prime cost mix will also be different based on your restaurant. Location, price point, quality of product, style of service. You get the picture? Well, let me paint it for you. could be a restaurant, maybe a family dining restaurant, run a 30% total cost of goods sold and a 25% labor cost. Well, that’s 55. You could run maybe a quick serve restaurant and you’re running a 20% cost of goods sold. You’re selling tacos, rice, beans, and so on.
But because your labor costs are going to be higher, you’re paying more to have people in your store, You may run a 35% labor cost. Well, 20 plus 35 is 55. You could be a steakhouse and run a 40% food cost. I wouldn’t recommend it, but you could. Why? Because the ring of the register is so high, my sales go through the roof. I don’t need more labor. It takes one cook to flip a burger. It takes the same cook to flip a steak that I make so much more in the ring of the register and bottom line profitability that I might run a 15% labor cost all up. 40 plus 15 is 55. See, based on your restaurant and your business, where that mix falls, I don’t know. That’s why you’ve got to create your budget.
Again, based on your core values and everything about your business. But now we can start to target where we need to be. That’s critical. Now, when you create that plan, we’re going to start to look at sales. Why sales? I want to find out what your sales mix is. For instance, let’s say I’m looking at a restaurant and 80% of their sales is food sales. 80%. So every dollar comes in, 80 cents goes to food sales. And I look down and go 2% wine sales. Two cents on every dollar goes to wine sales. Well, when I start to see 80% food and 2% wine, I know that I’ve got opportunity really in my kitchen. I can make the biggest impact on food costs and labor costs. Why?
Because it’s the primary engine to my restaurant. If I were to fix my wine costs from, say, 80% to 40%, I might make $2,000, spend all this time and energy to fix something that’s going to make me $2,000. But when I look at my food costs and I bring it down because 80 cents on every dollar is food and I’ve got all these kitchen people to put it out there, I might find a major change. 20, 30, $40,000 a year or more. So you’ve got to understand and create that budget. Find out where you can create the biggest impact in your business. So again, we can no longer just look at one part of prime cost.
You can’t search out information and hear one speaker talk about whether the podcast at a show, whether you go to a seminar, a webinar, whatever it may be. And they start talking about how you can fix your food cost. That’s great. But if you don’t look at prime cost, you’re going down the wrong path. And then you go see somebody else talk about labor costs and you start yelling at your managers about labor. They’ve got to go together. And the only way to see that, where you are and where you need to be, is to put together a budget. It’s critical. See, when you have a budget, you can create your plan for success.
What you’re going to do in order to achieve the numbers you need to, what systems we’re going to put in place, how quickly, how we’re going to train people, hold them accountable to achieve the numbers you need. So for example, a typical restaurant I talk to often runs as high as a 38% food cost. It is not unusual whether quick service, full service has not mattered. When you don’t have systems in place, you’re not paying attention. You think, oh, I’m not doing that bad. I’m only four points over at national average. So what we’re going to do is in month one, we create this template based on the last 12 months, what your next 12 months will look like if nothing changes.
Now we say, I’m going to implement three systems. I’m going to train three systems. Key item tracker to prevent theft, waste tracker to stop ******* mistakes in my kitchen, and the restaurant checkbook guardian to give up ordering without giving up my checkbook. Two clipboard systems and a spreadsheet because I have a budget. I’m going to drop my food cost two to three points, but I don’t do it overnight. You can’t hold managers accountable to something that you just trained them. So month one, we implement them. Month 2, we hold them accountable. We’ve given them 30 days to make it a part of their process, to ask questions, to ensure they know how to use those systems.
Now I’m going to hold them accountable to the key item tracker on a shift by shift basis, waste tracker on a daily basis, the restaurant checkbook Guardian every day that all the information goes in and that they order on budget with a little discrepancy. And I guarantee my members a two to three-point drop in their food cost. No recipe cards, no shelf to sheet inventory, no heavy lifting. Just by paying attention to your product. So now you can see that we start with that 38% food cost, but in month two we’re 35 because we’re paying attention. But we know how important it is to achieve a certain level of profitability.
And the only way to truly attack your menu is to have recipe costing cards. So you determine in month one, you’re going to sign up for a software package. You’re going to start putting the data in. You know it’s going to take you 100 to 200 hours to get it done. So you’re going to take about three months to get all the ingredients and every invoice up, everything ready to go, batch recipes all the way through items you sell. Now in month three, when that’s all done, when you have that data, we can take your product mix from your point of sale system, how many you sold and what you sell it for, plus the cost from these up to date current recipe costing cards.
We can find out what your ideal food cost is based on what your customers actually order, not some national average. An ideal food cost is if there was no waste, no theft, no spoilage, perfect restaurant, which does not exist. But if you followed recipes perfectly, And we know exactly what our customers ordered. And that’s with items that might be a 38% food cost appetizer that is frozen out of a box into a fryer to hand cut fresh cut French fries that have a 3% cost good sold and that menu mix and how that influences where your food cost should be based on what your customers actually ordered, not some national average. And when we find that we can make changes.
Now, I will tell you that a typical restaurant runs 7 to 9 points above their ideal food cost, which is astronomical because they’re not paying attention to theft, waste, spoilage, their line, their temperature, ordering, you name it. We’re not paying attention. So again, by putting the waste tracker Key item tracker and the restaurant check with Guardian by just paying attention to our product, we’re going to see that drop. Well, now we’ve got these recipes. Now we know what our food cost is, our ideal food cost. We have an expectation of seven to nine points above ideal.
Now I will tell you on a side note, if you have a rock star kitchen manager or chef, they will run 1 1/2 to two points above ideal. Rock star, like killing it. training, systems in place to control, clean kitchen checklists, supervision, like on fire. So keep that in perspective. Now we’ve got this information. Now we’re going to re-engineer your menu. And by re-engineering our menu, we can see that we’ve got some costs that are too high. Can we get a different product, a better product at a cheaper price? Can we reduce portion sizes? Can we raise the price? Can we get rid of an item? Can we add an item? Can we shift mix?
We do things with literally science, math, to change and influence what our customers may order. We can change what we put on the table, like remove items that are killing us and add new items from pizza and pasta, saute things that could have high perceived value, high ring at the register, low food cost. And we may decide in month 4, we’re going to put on a menu that is an ideal food cost of 24%. And in the meantime, we’re putting in checklists for opening, closing side work checklists in the back house. We’re making sure our supervisors are following those. We’re going to put in key item tracker, waste tracker, the restaurant checkbook guardian. We’re going to have mise en place set up.
We’re going to have line checklists, time temp checklists, like we’re dialing in. And we’re going to have a rock star chef or kitchen manager. And that 24% ideal is going to translate to a 26% actual. Now in month four, we started at 38%. We’re now down to 26. Now we also know because 80% of our sales is food and our higher wages tend to be in the kitchen. Holy crap, let’s look at this business. 5% labor cost all up in the kitchen. Line cooks, prep cooks, dishwashers. 5% dish. We go, that’s way too high. Way too high. I’m going to tell you, I have most of my members, we’re trying to hit a 10 to 12% labor cost in back of house total. So now we start looking at dish and go, that’s a luxury.
Don’t get me wrong. Most important person in your restaurant on a busy Friday night, they make sure everything happens. But on a Monday lunch, When you’re doing $500 in sales, why do I need a dishwasher? Why can’t my cooks do the dishes? Why can’t my servers make sure they really prep those dishes, scrape, pre-soak, and do all the things necessary that maybe we stack them up that when the dishwasher comes in the afternoon, there’s not that much there. They just start working. Like you can find ways to reduce those hours. Prep. Prep. Sometimes we labor creep and prep. We have a scratch kitchen. Oh my God, you’re the only people who make things from scratch.
Well, I’d rather shift some of that prep to my line cooks. During those hours when they’re standing around talking, doing nothing, they could be prepping, reducing my prep cook hours. And all of a sudden I get things done. Well, would you rather lose, if you lost some hours, would you rather lose them from your line cooks or your prep cooks? You’re prep cooks, right? I want my highly skilled line cooks to be available throughout the year. I need to keep them and give them as many hours as possible.
See, all of a sudden, when we redo our menu, re-engine our menu, we may reduce our prep, simplify the number of items we have, reduce our menu, become more efficient on the line, and all of a sudden reduce our labor. Again, my goal is 10 to 12 percent, but I want to be very clear. Some of you are in high labor states. 20 because that’s what the great resignation has done. It has raised like we were worried about $15 minimum wage. Oh my gosh, it’s going to hit us. Man, we’re past that now. COVID has us past that. And so now all of a sudden we’ve got these higher wages. I’ve got some members that it’s okay. Maybe you’re going to run 13, 14%.
Heck, I may have had one or two people that have gone to 15. While that hurts, And we got a plan to get sales up to bring that down, really 10 to 12 for most people, maybe 13, 14 in general. That’s where we may do. So in order to get the labor cost down in this example, we start looking at what are our minimum staffing levels? You know those months that sales are so low? You got one server, you got one cook and one manager and your labor cost is through the roof? you need to figure out what those minimum staffing levels are because in the slow months in our budget, we may run a 38% labor cost on purpose. But then we also want to look at the opposite is true.
Let’s look at our maximum efficiencies. When we’re crushing it and we’re doing $300,000 a month and we’re busy as hell, we couldn’t add another line cook, another server, another cashier, whatever it may be. and we reach maximum efficiencies. We may have more sales, but we couldn’t add any more labor. And so all of a sudden my labor cost drops and in that month it might be 22%, 38, 22. You see what I’m saying? And by using a budget, we can see every month where that labor target should be that we can achieve the 55% prime cost for the year.
But as we start to attack, say these months that our labor looks really high, it’s 15% back of house, we say, wait a second, what if I look at this and say, what if I drop that by two points in line cooks and it equals X 1000 dollars, X $100, whatever it may be? And I’d say, okay, what’s your average cook get paid? Oh, $18. Take $18, divide it into whatever that decrease in money is going to be for that month. and then extrapolate how many hours that is. And based on just four weeks, how many is an hours in the week and then how many a day, right?
We’re going to take this number, how much money we’re going to lose to budget, meaning we’re going to reduce it, divide it by the average hourly wage, come up number of hours, and we’re going to bring that down to how many hours we’d have to trim on a daily basis. And it is amazing. You’re going to find, oh, we’ve got to trim 4 hours a day. Is that possible? no, I couldn’t do that. I’m going to lose a cook. Wait a second. What if we brought in four cooks 15 minutes later in the morning because we had the nighttime completely flip the line. It’s ready to go. Could you bring 4 cooks in 15 minutes later? Oh yeah, I could do that. Well, what if we did the same thing for the nighttime crew?
Could you bring 14 cooks in 15 minutes later? Oh yeah. Well, that’s two hours a day. That’s 14 hours in a week. What other major, what major changes do you have to make? No. What minor changes do you need to make to stagger start and share the pain and make sure if you’re busier, people can work longer, that you’re really not dinging them. But we’re keeping everybody employed and we’re making these tiny little adjustments to become more efficient instead of bringing everybody in at the same time and they leave at the same time. That’s what a budget can allow you. Now I can tell you, my members, We’ve created plan after plan after plan. I’ve been doing this since 2003.
But particularly my restaurant transformation intensive program, we actually do your budgets for you with you. And here are just a few examples of what my members have actually done in the last year. One of my members needed to drop their food costs from 38%. They were a brew pub. They had craft beer, incredible product. When they started, they had a chef that literally made this chefy driven menu with all these unique items from truffle fries, you name it. The prep was unbelievably hard. You needed highly skilled line cooks because you were building so many different dishes and the food cost was outrageous. Food cost was 38%.
We needed, in order to give this restaurant a chance because they had higher debt service, higher than most. We had to get their menu down to a 26% food cost. 38 to 26. How’s that possible, David? I got them to spend $40,000, no **** on a pizza oven to have wood-fired pizza. High quality, high perceived value, low food cost. And they hired, because I’m not a chef, they hired a chef consultant to help redo the menu, to simplify prep, to dovetail, cross utilize products, to get the most out of their menu and reduce the number of hours they need in the kitchen. 5%. And that was the new menu. They got their prime cost to 55%. Another restaurant operator has two restaurants.
needed to drop his food cost because of COVID from 36% to 26% in order to survive and give his concept a fighting chance to make it. And there were primarily burgers and beef items on their menu. Those were their big sellers. 5%. Yeah, they’re a half point off, but that’s a major change. One more example. I have a restaurant owner who has a sports bar concept. And do I need to tell you what happened to chicken wings during COVID? Right? Just in 2021, from January to June, they went up over 100%, let alone whether you could get them. Wings were out of control.
And we saw that with lower sales, with higher costs, higher labor costs, it was going to get really tough to make it and still be that kind of concept. But we know that he has a plan to move his business to a bigger location. And because he had experience with pizza in the past, we’ve determined that he needs to add a new pizza oven to the new concept and drive his food cost down to 26 because that makes his restaurant not only able to survive, but to make money with a full management team in place and all the labor he needs. Because we can change the mix by adding this low food cost item and still charge for it. We could still sell the chicken wings.
See, these three members proactively changed their business because they created a plan, a plan for success, their budget. We did it for them, with them. Nothing was ever jammed down anybody’s throat because we’re not going to change who you are. Now do know while we just spent all this time focusing on prime cost, controllable expenses, in many cases there’s lots and lots of opportunities in your operating expenses too. But I wanted you to focus on what you can control right now to make a huge impact in your business. See these members created a plan. and you can too. So you need to create your budget template.
You need to decide what systems you’re going to put in place and what your expected results are going to be by when. You need to implement, train, and hold managers accountable to your plan or your plan will not work. And if you’re like my members, and when I have someone guide you through the process, heck, do it for you with you, maybe you should think about getting on a discovery call with me. and learn about my restaurant transformation intensive group coaching program, where we actually do all this for you with you. Either way, you’re in control. Hey, that was an awesome episode. I want to thank you for taking the time to take action on building a better, more prosperous restaurant.
Before you go, I want to give you these three thoughts. One, by combining leadership and taking action with systems and training being checked by accountability, you are on your way to creating prosperity for you and your restaurant. Two, I have something I need from you. Please leave a review on Apple Podcasts, Spotify, or wherever you happen to listen to podcasts. By leaving us a review, other restaurant pros seeking out this information are able to find it. I read the reviews and hearing how this information has benefited you does wonders for me. And three, if you find any of the discussions helpful, share them.
The more restaurant pros who have access to them, the better we become as an industry. com. Be passionate about what you’re doing. Be persistent, but more importantly, become better and help everyone around you become better. And your restaurant is going to kick some ***.